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Treasury: Don’t Let a Recession Stop Credit Access

Countercyclical policies will be crucial in future housing finance reform, at least according to a recent report from the U.S. Department of the Treasury.

Part of an ongoing series of housing reform posts from Treasury, the most recent article calls for a more clearly-defined government role and a framework of countercyclical policy tools to protect homebuyers—and the overall economy—during downturns and recessions.

“When the economy expands and contracts, the housing sector usually expands and contracts to a greater extent, as it is more volatile than the overall economy,” the report said. “A housing finance system that pulls back credit during downturns not only hurts families trying to buy homes, but can exacerbate the broader downturn.”

According to the report's writers, Jane Dokko and Sam Valverde, more countercyclical policies could help lessen this volatility and protect families across the nation.

“By ensuring access to safe and responsible mortgages in good and bad times, countercyclical policy tools can also help mitigate housing sector weakness during downturns,” the report said.

The writers also called for the government to play a bigger role in the housing finance system, while acknowledging that, despite its more laid-back role now, the government would still step in in the event of a serious housing collapse. However, whatever action taken, they said, would be less effective and costlier than it needs to be.

“We note, however, that the absence of an explicit government role in a future housing finance system would not prevent the government from supporting the housing market during a downturn,” the report stated. “Indeed, recent experience suggests the government would almost certainly need to intervene in the event of a sufficiently severe shock to the housing or mortgage market to avoid a collapse in access to credit for creditworthy borrowers. However, without a clearly-defined role for the government in the housing market, these interventions would be costly to taxpayers and their effectiveness would likely be more limited.”

The post noted the Housing and Economic Recovery Act as one of the many governmental actions taken during the Great Recession, but despite their efficacy, Dokko and Valverde believe they are not a permanent solution to the “structural weaknesses of the housing system.”

Instead of corrective actions, the writers suggested three finance reforms that could ensure credit access despite what current economic state the country may be in.

“Three key features of a reformed housing finance system would help smooth access to affordable credit in good and bad times: (i) a catastrophic mortgage insurance fund (MIF) to provide stability to the secondary market through the economic cycle, (ii) countercyclical regulatory tools to ensure access to safe and responsible mortgages in good and bad economic times, and (iii) broad-based modification and refinancing authority so that homeowners can readily access lower monthly mortgage payments during a downturn,” the report stated. “With these tools, a housing finance regulator can help protect American families’ access to affordable and sustainable mortgages and rents in all economic conditions, and mitigate the spillovers from weakness in the housing sector to the broader economy.”

About Author: Aly J. Yale

Aly J. Yale is a freelance writer and editor based in Fort Worth, Texas. She has worked for various newspapers, magazines, and publications across the nation, including The Dallas Morning News and Addison Magazine. She has also worked with both the Five Star Institute and REO Red Book, as well as various other mortgage industry clients on content strategy, blogging, marketing, and more.

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